Host Hotels & Resorts, Inc.

Greetings and welcome to the Host Hotels and Resorts Second Quarter 2020 Earnings Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Tejal Engman, Vice President of Investor Relations for Host Hotels and Resorts. Please go ahead.

Thank you and good morning, everyone. Before we begin, please note that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings for the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information such as FSO, adjusted EBITDA RE, cash burn, and hotel results. You can find this information together with reconciliations to the most directly comparable GAAP information in today's earnings press release in our 8K file in the BSEC and in the supplemental financial information on our website at hishotels.com. Participating in today's call with me will be Jim Rizzolio, President and Chief Executive Officer of Brian McNamara, Principal Financial Officer and Controller, and Sourav Ghosh, Executive Vice President, Strategy and Analytics. And now, I'd like to turn the call over to Jim.

Thank you, Tejal, and thanks everyone for joining us this morning. We hope that all of you are staying safe and healthy during these extraordinary times. The lodging industry experienced a challenging second quarter, with record red part declines in April, followed by a slight improvement in lodging demand through May and June. Working with our operators, we responded swiftly to the changing demand landscape by reducing our second quarter hotel operating expenses by 72% year over year. As states and markets began to ease their lockdowns, our portfolio achieved over 100% hotel revenue growth from the lows of $24 million in April to $49 million in June. Toward the end of the second quarter, we successfully amended our credit agreement and achieved outstanding terms that preserve our liquidity and retain our flexibility to capitalize on value-enhancing investment opportunities. All in all, we emerged from the most challenging quarter on record for Host and the travel industry with significantly lower operating costs greater balance sheet flexibility, and access to $2.5 billion of liquidity. Starting with operations, our second quarter expense reductions and revenue growth were driven by exceptionally agile asset management and the swift reaction of our world-class operators. As lodging demand plumbed to record lows in April, we worked with our operators to suspend operations at 35 hotels, reduce hotel fixed costs by approximately 50% and reduce overall hotel operating costs by 72% year over year. Cost savings were primarily driven by steep reductions in wage and benefit expenses and the fixed portion of above property allocated costs, as well as by suspending most brand standards and contributions to hotels FF&E reserve accounts. At operational hotels, our managers significantly scaled down operations by closing guest room floors and meeting spaces. When leisure demand began improving through May and June, we swiftly pivoted to reopen hotels and work with our operators to drive 380 basis points of average occupancy gains and a 50% increase in average room rates across the portfolio from April to June. As of yesterday, 64 of our 80 consolidated hotels, representing 78% of our total room count, were operational. We prioritized reopening eight suspended hotels located in drive-to leisure markets, including Florida, San Diego, Phoenix, San Antonio, and Orange County, as these markets captured leisure demand and delivered higher second quarter rep part than the rest of our portfolio. We currently expect another six hotels to reopen in August with operational rooms representing nearly 90% of our total room count by month end. As a reminder, we work with our operators to reopen a property when it's expected to sustain approximately 10 to 15% occupancy levels. At those levels, we expect incremental revenues to exceed the incremental cost of being operational. resulting in marginally lower EBITDA losses. Our preference is for hotels to remain operational rather than suspended because an operational property is capable of capturing spontaneous short-term demand and better positioned to attract future demand when the market begins to recover. All that said, we continually review our hotel's occupancy trends and won't hesitate to suspend a hotel's operations when the marginal benefit of remaining operational turns negative. For instance, we are currently reviewing the New York and San Francisco markets. New York has been slow to reopen with the recent pause on indoor dining and the cancellation of the 2020 United Nations General Assembly and New York Marathon events, while San Francisco has enacted an onerous, costly, and unnecessary operating ordinance. As we delivered both significant expense reductions and gradual revenue improvement, we reduced our hotel-level operating loss by nearly 50%, from $73 million in April to $37 million in June. Our hotel-level monthly operating loss averaged $54 million, while above-property corporate-level monthly cash flows averaged $79 million in the second quarter. with the latter reflecting a concentration of CapEx, which is expected to decrease by approximately $100 million in the second half of the year. We ended the second quarter with $2.5 billion of available liquidity, which includes $750 million of available capacity under the revolver portion of the credit facility, as well as over $150 million of FF&E escrow reserves. Assuming operational performance remains at second quarter levels, we would expect approximately $100 to $110 million of total monthly cash outflows, reflecting an average hotel-level loss of approximately $50 million a month, as well as estimated capital expenditures, interest payments, and general corporate overhead. In this scenario, we would expect to end 2020 with approximately $1.8 to $1.9 billion of total available liquidity. If operational performance remains at second quarter 2020 levels beyond year end, we would have ample liquidity until mid 2022, even with CapEx near 2020 levels, subject to continued covenant waivers for our credit agreement. Moving on to our balance sheet, Our quarter end leverage ratio, as defined in our credit facility, was at 4.6 times. Our interest coverage ratio was at 4.4 times, and our fixed charge coverage ratio was at 2.7 times, all of which were within the limits specified in our prior credit facility covenants. With the amended credit agreement in place, our quarterly tested financial covenants were waived beginning July 1, 2020, through the second quarter of 2021, with testing to resume for the third quarter of 2021. Although the duration of this pandemic-induced crisis remains unknown, we continue to expect our liquidity position and balance sheet capacity to remain key comparative strengths that differentiate Host as one of the few lodging REITs that is less likely to need to issue equity expressly to deliver its balance sheet. Shifting to business performance, we saw clear signs of a recovery in consumer demand through May and June as state and market lockdowns began to ease. Our booking pace indicated a solid pickup in June and the trend leading into the third quarter, but has since decelerated since daily infection rates in certain markets have spiked. Thirteen of our top 20 markets have regressed their reopening phases in the last three to four weeks, while the other seven remain in their existing phase. Needless to say, this trend has impacted our reopening plans. When Hawaii announced that on August 1st, they would lift the 14-day quarantine requirement for travelers who test negative for COVID-19 up to 72 hours prior to arrival, Beyond the Book's occupancy for our Maori resorts quickly reached mid-teens. We therefore expected to reopen the end of Maui and the Fairmont Kealani in August, but have now delayed our reopening plans as Hawaii has extended the quarantine through at least the end of August. Surprisingly, we saw some group business in the second quarter, despite the absence of a vaccine or an effective therapeutic. Excluding New York, which benefit from COVID-19 related emergency services group business, traditional group business showed signs of improvement as it grew from 1,700 room nights sold in April to 12,855 sold in June. For the whole portfolio, business transient room nights grew 150% to 12,450 room nights in June after bottoming at 4,850 room nights in April. While business transient demand has primarily been driven by defense contractors, we have begun to see consulting related business travel in July. Government transient room nights also improved from 650 room nights in April to 6,450 room nights in June. Finally, contract business held up relatively well in the second quarter with 43,000 contract room nights sold in the quarter. Our San Antonio hotels increased airline crew volume year over year, while Newark Airport, Hyatt Place Waikiki, and Grand Hyatt Buckhead all saw production improve throughout the quarter. As of June, our properties had 1.8 million group rooms on the books for the full year 2020, down nearly 62% from 4.6 million group rooms same time last year. Our total group revenue pace is down 81% in the third quarter and 49% in the fourth quarter. And we continue to expect group cancellations in the second half of the year. We have rebooked approximately $120 million of canceled total group revenues with an additional $96 million in the pipeline that collectively represent nearly 21% of the total group revenue that canceled this year. We are also working with our operators to find creative ways to fill the demand gap with long-term group blocks from schools, sports associations, and corporates. For example, Houston Airport Marriott received a large corporate group booking of 175 rooms per night from July to December in addition to another corporate group booking of 100 rooms per night on a month-to-month basis. The rooms are being used to quarantine COVID-19 negative employees for 14 days prior to international deployment. Looking at next year, we are experiencing a high single-digit deceleration in our total group revenue booking pace for 2021, as measured by definite revenues on the books, with most of the deficit concentrated in the first half of next year and minimal impact to the second half. Our tentative revenues, however, are tracking nearly 30% ahead of the same time last year, reflecting robust pent-up demand that's waiting for the current health and safety risk to subside. Our business outlook depends upon how quickly we, as a nation, can flatten the rate of new COVID-19 infections while we await a more effective solution. which we expect will take the form of a vaccine. In the interim, increasing consumers' confidence in our industry has never been more important. The major hotel brands have been proactive in creating, implementing, and communicating new cleanliness and health and safety standards, including corporate requirements for face coverings to be worn within indoor public spaces. These safety protocols help address the risk of contagion and establish trust with consumers. Specifically at Marriott, long known for consistency and reliability, we expect their commitment to clean program to resonate with both business and leisure customers alike. Encouragingly, as a percentage of second quarter revenues, our direct sales through Marriott.com increased 400 basis points over last year, compared with sales through OTAs increasing by 200 basis points. As we have consistently said, host benefits from our strong affiliation with world-class hotel brands. We continue to believe that beyond strong loyalty programs, brand trust and reliability will be differentiators that will help host outperform during the recovery. We remain deeply committed to redefining our operating model with the immediate goal of achieving break-even as soon as possible and the longer term goal of generating higher profitability at lower levels of occupancy. In the 2009 recession, several operating expense line items were significantly reduced and continued to improve through the cycle. Downturns compel owners and operators to reevaluate brand standards, programs, and above property expenses. an exercise that can result in long-term savings and a healthier hotel operating model that better serves customers' changing needs. To that end, we are working with our operators to deliver permanent cost savings at the hotel level through the following three key initiatives. First, to achieve a long-term reduction in the fixed component of above-property charges. Second, to adopt productivity-enhancing technology, such as the use of mobile key. And third, to drive efficiencies through the cross-utilization of management functions. While achieving these long-term permanent cost savings is conditional upon reaching an agreement with our operators, we have analyzed the potential benefit they could have on our operating model. Based on 2019 revenues, we believe these measures have the potential to reduce annual hotel-level expenses for our current portfolio by an aggregate $100 to $150 million, which represents approximately 3% to 4% of pro forma 2019 hotel level expenses. Turning to our supply outlook, although there has been little evidence of a material decline in supply so far, there is a historical pattern of supply rationalization after large demand shocks. When we look at the historical supply trajectory for the top 60 to 70 markets rooms under construction and major markets fell by 68% two years after the peak of 2008 and we're down 77% by mid 2011. We therefore expect supply will be mitigated over the long term with rooms under construction declining over time and likely bottoming at even lower levels than in the last recession. given the significantly greater degree of distress. In addition, we expect record levels of permanent hotel closures due to the unprecedented level of distress in the market. According to TREP, the lodging delinquency rate has risen from 2.7% in April to 19% in May and has reached approximately 24% in June. Our analysis indicates that nearly 30% of upper tier hotels in our top 20 markets are temporarily closed. Seven hotels in our top 20 markets are reported to have permanently closed already, and we expect more of the temporary closures to become permanent. To conclude, we have experienced four months of significant economic uncertainty as our nation locked down, began to reopen, flattened infection rates in certain markets, and experienced sharp increases in others. Although we expect economic uncertainty to prevail until the health and safety risks posed by the pandemic are fully addressed, we are encouraged by the following. First, our operator's ability to adapt the operating model to record low levels of demand by reducing our hotel-level operating costs by 72%. Our goal is to make a portion of these cost reductions permanent and to achieve higher levels of profitability at lower levels of occupancy. Second is the resilience of lodging demand, which began to return as states and markets reopened and, as our booking trends indicated, would have been greater had infection rates continued to flatten rather than rise. Although there is some debate about the future of business travel as professionals grow accustomed to virtual meetings, We would note that U.S. occupancy has achieved higher peaks following the last three downturns, including 9-11, when many believed air travel would be permanently impacted. While speculating on long-term behavioral trends in the midst of the biggest global health and safety crisis in a century is likely to be unproductive, business transient and group business customers have a proven track record of choosing the effectiveness of in-person interactions despite the efficiency of video conferencing technology. Finally, we are confident in the strategic advantages provided by our financial capacity to withstand prolonged business disruption. HOST is differentiated in its potential to not only survive this crisis, but also to capitalize on future long-term value creation opportunities that meet our strategic objectives. We are excited to have entered a new cycle with the highest quality portfolio of iconic and irreplaceable hotels in the company's history and likely in the lodging industry. When demand recovers, we believe that the quality of our assets, many of which will be newly renovated, will be a true differentiator that will help us gain Red Power Index share and outperform the industry. We continue to believe in the strength of both geographic and demand diversity through the cycle. Geographic diversity will serve us through an uneven recovery as various states and markets recover differently, while demand diversity will help us drive optimal revenue management and pricing through the cycle. My remarks would not be complete if I didn't mention how conversations about confronting systemic racism have reverberated throughout our society. Diversity, equality, and inclusion remain at the forefront of our priorities and integral to our corporate values. I was proud to recently join the CEO Action for Diversity and Inclusion Initiative. And as an organization, HOST remains committed to fostering these values in our company and our communities. With that, I will turn the call over to Brian.